Are your wealthy clients cheating on you?

Mar 27, 2011 @ 12:01 am

By Jeff Benjamin

Reluctant to entrust their financial assets to any one financial adviser, the nation's top tier of investors is spreading its wealth.

According to Cerulli Associates Inc.'s latest research, scheduled for release today, 57% of U.S. households with at least $10 million in investible assets are working with five or more advisers. Nearly 64% are working with at least four advisers.

That is a huge jump. In 2008, barely 16% of wealthy households had four or more advisers, according to Cerulli.

As an indication of how much has changed, just 19% of such households now work with just one adviser.

“During the financial crisis, we found that high-net-worth investors started to increase the number of financial advisers they were working with, even though there will often be one alpha adviser among the relationships,” said Robert Testa, a Cerulli senior analyst.

One of the factors leading wealthier households to diversify their advisory relationships is a “solvency issue,” according to Cerulli senior analyst Katharine Wolf.

“Clients have become more worried about whether their assets are safe, and they don't want to place all of their assets with one adviser,” she said. “These wealthier clients started looking for second and third opinions, and they will sometimes use small amounts of money to try out a new adviser.”

Cerulli also found that 44% of wealthy households have changed their primary adviser during the past 12 months. (See the 'Top 9 reasons wealth clients use advisers.)

The trend toward shopping around is a logical response to a tumultuous market cycle, said Scott Miller Jr., managing partner at the $300 million advisory firm Blue Bell Private Wealth Management LLC.

“We have three clients that had several relationships, but they have since contracted to just two advisers,” he said. “They want to compare pricing and things like that, but mostly, these clients want to hear different ideas.”

Confirming a Cerulli finding, Mr. Miller said that he also has noticed an increased number of wealthier investors who want to test the relationship by giving the adviser a small amount of money with which to work.

“I'm sure part of it is about mistrust after everything that has gone on recently,” he said.

The “Cerulli Special Quantitative Update: Investors in the High-Net-Worth and Ultra-High-Net-Worth Marketplace” report is based on continuing analysis of 400 affluent households that have at least $10 million in investible assets.

“[Bernard] Madoff scared a lot of people,” said Jim Holtzman, an adviser with Legend Financial Advisors Inc., which has $400 million under advisement.

“There are a lot of reasons [people are scared], but the crisis in 2008 is probably the big one,” said Mr. Holtzman, who has had newer clients come to him with multiple advisory relationships.

Clients are looking for a “diversification of advisers, different investment strategies, even different methods of client service,” he said.

Being road-tested by a client doesn't always sit well with established financial advisory firms, but it does represent the potential for new business, according to Lew Altfest, president of L.J. Altfest & Co., a $700 million advisory firm.

“We've had a lot of people come to us wanting to give us a share of their money,” he said.

“Normally, we're not inclined to do that, but we've decided to look at it opportunistically. We're more flexible with obviously valuable clients,” Mr. Altfest said.

On the issue of solvency concerns, he can certainly relate.

“People, particularly here in New York, are pretty shaken by the Madoff experience,” Mr. Altfest said.

In addition to wanting to diversify their advisory relationships, these wealthier households tend to view their overall net worth in various compartments, based on certain needs and investment ob¬jectives, the report found.

“We found that a lot of these households have a specific number in mind that they need to ensure a certain standard of living and to educate their children,” Ms. Wolf said. “Their primary fear is losing money beyond that number in.”

Maintaining a comfortable standard of living ranked as the top priority by about a third of the households studied, followed by education funding, which was a top priority of one of every five respondents.

Once the top priorities are covered, however, the research found that wealthier households are ready to shoot for the stars in terms of investment performance.

The overwhelming majority of households — about two out of three — are looking for annual investment returns of 15% or more.

Toward that goal, 59% of households studied indicated that they are investing in hedge funds. And of those investors, 63% have at least $750,000 invested in hedge funds.

“As wealth increases, so does the complexity of the investments and the overall relationship,” Mr. Testa said.

The bottom line, according to the Cerulli research, is that advisers should be prepared for the higher level of wants and needs that come with working with wealthier clients.

On average, the households studied had more than 13 in-person meetings with their primary adviser each year, as well as more than 18 adviser-initiated phone conversations.

Add to that another 18 client-initiated phone conversations, and advisers are speaking with these clients about 50 times a year.

“That level of contact is expected,” Ms. Wolf said.

InvestmentNews reporters Lavonne Kuykendall and Andrew Osterland contributed to this story.

E-mail Jeff Benjamin at


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